Top 10 Most Regressive Tax States

In the states whose tax systems most favor high earners, low-income families pay up to six times as high a share of their income as the wealthiest families, according to a report by the Institute on Taxation and Economic Policy.

By Michael S. Fischer|February 05, 2013 at 09:16 PM

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State tax systems rake in a much larger share from middle- and low-income families than from wealthy families, according to a study released Wednesday by the nonprofit Institute on Taxation and Economic Policy.

For all of the combined state and local income, property, sales and excise taxes state residents pay, the average overall effective tax rates by income group nationwide are 11.1% for the bottom 20%, 9.4% for the middle 20% and 5.6% for the top 1%, the study found.

“We know that governors nationwide are promising to cut or eliminate taxes, but the question is who’s going to pay for it,” Matthew Gardner, executive director of ITEP and an author of the study, said in a statement.

“There’s a good chance it’s the so-called takers who spend so much on necessities that they pay an effective tax rate of 10% or more, due largely to sales and property taxes. In too many states, these are the people being asked to make up the revenues lost to income tax cuts that overwhelmingly benefit the wealthiest taxpayers.”

State consumption tax structures are particularly regressive, he said, with an average 7% rate for the poor, a 4.6% rate for middle incomes and a 0.9% rate for the wealthiest taxpayers nationwide.

The study found that of the 10 most regressive states, four have no taxes on personal income, one state applies it only to interest and dividends and the other five have a flat or virtually flat personal income tax across all income groups.

Five of the 10 most regressive tax systems rely heavily on regressive sales and excise taxes, deriving roughly half to two-thirds of their tax revenue from these taxes, compared with the national average of 34% in FY09-10.

In contrast, the study found that the least regressive tax systems—those of Delaware, District of Columbia, New York, Oregon and Vermont—had highly progressive income taxes and relied less on sales and excise taxes.

“Cutting the income tax and relying on sales taxes to make up the lost revenues is the surest way to make an already upside-down tax system even more so,” Gardner said.

Following are the 10 most regressive tax states, with each income group’s effective tax rate, according to ITEP.

10. ALABAMA

Bottom 20%: 10.2%

Middle 60%: 9.4%

Top 1%: 3.8%

Progressive Features

Provides one of the largest property tax homestead exemptions in the country

Regressive Features

Narrow income tax brackets mean majority of taxpayers pay top income tax rate

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